NO SIGN OF A BOTTOM YET AS EARLY BOUNCE FADES -- SELLOFF IN TRANSPORTS AND SMALL CAPS DEEPENS -- TWO SECTOR SPDRS THREATEN 200-DAY AVERAGES -- WHILE ANOTHER ONE SLIPPED BELOW ITS RED LINE -- SPX MAY BE HEADED TOWARD ITS 200-DAY LINE
S&P 500 APPEARS HEADED TOWARD 200-DAY AVERAGE... An early rebound attempt faded today and the Dow and S&P 500 ended the day lower. Only the Nasdaq managed to hold onto a small gain. The Dow Industrials closed below their 200-day average for the second day in row. And the S&P 500 appears to be heading in that direction. The daily bars in Chart 1 show the S&P 500 closing today at the lowest level in twelve weeks. It's already lost 50% of its gain measured from its early October bottom with no convincing signs of bottom being formed. That raises the odds of a further drop to its 200-day average (red arrow). A drop to that level would constitute about a 62% retracement of its prior four-month uptrend (see horizontal Fibonacci retracement lines). And would also put it to close to potential chart support along its July/September peaks. That would be a more logical spot for it to attempt a rebound of some sort. Although a short-term oversold condition exists, so does the presence of overhead resistance along its broken January low (red line) which could cap any rally attempt. Some parts of the market are already trading below their 200-day averages which carries a negative message for the market as a whole. They include the Dow Transports and small and mid cap stock indexes. In addition, a number of sector SPDRs are threatening their red lines as well.
FINANCIAL AND DISCRETIONARY SPDRS ARE TESTING 200-DAY LINES... The Energy SPDR (XLE) fell to the lowest level in four years today and remains the market's weakest sector. The commodity-heavy Materials SPDR (XLB) fell below its 200-day average yesterday. Two other sector SPDRS are now threatening their 200-day lines. Chart 2 shows the Financial SPDR (XLF) bearing down on its red line; and potential chart support along its July/September highs. A record low in bond yields this week is taking a toll on that rate-sensitive group. Chart 3 shows the Consumer Discretionary SPDR (XLY) nearing its 200-day line as well. The XLY is being led lower by coronavirus-exposed stock groups related to tourism as well as cruise lines, gambling, and hotel stocks whose indexes have all fallen below their 200-day lines. As well as retail stocks. The S&P Retail SPDR (XRT) closed below its 200-day line today. A third sector SPDR also ended below that long-term support line today.
INDUSTRIAL SPDR ENDS BELOW ITS 200-DAY LINE... Chart 4 shows the Industrial Sector SPDR (XLI) ending the day below its 200-day line and in heavy trading. It's also fallen below the previous peaks formed during the second half of last year (flat trendline). The XLI is being lower by airline stocks which have lost -15% this week; as well as other transportation stocks. That makes the XLI the third sector SPDR to fall below that long-term support line. It remains to be seen if the XLF and XLY shown above can hold onto their red support lines.
A HIGHER VIX MAY BE NEEDED TO SIGNAL BOTTOM... Monday's message shows the CBOE Volatility (VIX) Index rising above the 25 level for the first time in a year. It dipped slightly today but remains at an elevated level of 27. In previous market selloffs, it took spikes in the VIX to the high 30s to signal a market bottom. Absent that, the VIX would have to drop below its long-term average at 20 to negate this week's upturn. Its current reading of 27 isn't high enough to signal a bottom; and too far above 20 to support higher stock prices. That suggests that stock prices probably have further to drop before a bottom is reached. That might take a VIX reading well above the 30 level.
